Thursday, November 26, 2015

Philidor 2.0: Valeant and Stephen King play Chess with a lot of pharmacies

(b). It has raised their prices sometimes to absurd levels ($1000 acne antibiotics with full generic substitutes is an example)

(c). It claims to raise volumes of these products.

I call this the improbable trio. It seems improbable that a company could do this. Not impossible, just improbable.

The trick it appears is reliance on non-traditional distribution models.

The size of non-traditional channels

Valeant's non-traditional channels are very large. During the dispute between Allergan and Valeant Allergan noted that the IMS sales data for Valeant products was crappy.

Valeant responded that IMS data was unreliable for Valeant. To quote:

U.S. IMS data will cover less than 30% of Valeant’s business and, for that portion of Valeant’s business IMS covers, the IMS data will not properly collect sales through a numbers of channels (e.g., specialty pharmacy, physician dispensed sales, corporate accounts, and alternative fulfillment).

The non-traditional distribution methods are hugely important in Valeant.

The Philidor allegation

The Philidor allegation is that Valeant [through undisclosed proxies] established or owned pharmacies (such as R&O in California) and used their pharmacy numbers to deceive insurance companies into believing that scripts for expensive drugs with generic substitutes were being presented at smaller suburban pharmacies rather than at a Valeant captive pharmacy.

This is very expected out of Valeant. I guess its too difficult to come up with so many names and keep track of them so they need the themes. Basically you have a problem in business when you need to sell products at prices that nobody in their right mind would pay for. Clearly they are desperate to come up with a new way to get insurance companies to overpay for their products so they can reduce the debt. The entire strategy of paying up to buy products so you can raise prices and aggressively push them in the market is failing and now all they can do is come up with a new confusing way to get reimbursements thru the channel.

I love how the shorts never look at the full product lineup. Look at their top 20 or 30 drugs and come back and tell us which ones are vulnerable. You actually haven't done any real work on the products.

11/22/15 - "Why was Gary Tanner "Forsta LLC" and Jake Power "Pharmicist In Charge - PhilidorRx in Arizona" appearing in a Arizona Board of Pharmacy Meeting on 11/18/2015 just last week?*Are they that stupid to show up? *Meet Forsta Pharmacy and Wholesaler - FORSTA LLCWas formerly called LUDLOW PHARMACY LLC..."

This is a great find! Kudos! I noticed however that all of the registrations seem to have been filed in the June-July timeframe, i.e. before the Philidor allegations came to light. Did you find any registrations that were more recent?

"Bloomberg has reported for instance that Philidor staff routinely wrote "dispense as written" on scripts to prevent generic substitution. [This is fraud.]"

Philidor claims that they ok'ed it with the prescribing doctor before adding "dispense as written". This is mentioned in the Bloomberg article you referenced but I'm glad to see you don't let little inconvenient facts like this get in your way.

In any case its deeply outrageous the lengths Valeant will go to try to make the insurance companies pay for the drugs that the doctors prescribe.

The doctors who prescribe these drugs are Valeant captives too, right?

There are a couple called Key Square GP LLC (10/1/2015, 5839531) and Key Square Group LP (10/1/2015, 5839534) - (Key Square is a square where occupation by attacking king will result in win no matter whose move)

All of the above are through Corporation Services Company which seems to be the preferred agent for BQ6/Philidor-created entities.

There are a couple of others, set up through Harvard Business Services (so may not be related). 5549723 Prophylaxis LLC (in chess means 'guarding beforehand', or prevention) set up 6/11/2014. The term prophylaxis chess was introduced by Aaron Nimzovich in his book My system in the 1920s.

Then there were 100 LLCs set up named Nimzo 1 LCC through Nimzo 100 LLC on 2/4/2015. The Nimzo-Indian Defense was developed by Aaron Nimzovich (a.k.a. Aron Nimzowitsch). From chess wiki, the Nimzo Indian Defense openings are characterized by 1. d4 Nf6, 2. c4 e6, 3. Nc3 Bb4 [note the NC3] but unlike other Indian defenses is NOT followed immediately by a fianchetto move [Fianchetto was another BQ6 creation in 2010].

Kudos on the Stephen King names and linking them to those pharmas in the Fifty Moves LLC grouping!

Your assertion that these dispensers are all related may very well be true, but your attribution of the actions to Valeant needs something more substantive to close the loop. It may have been a methodology used by the middle tier related pharmas to increase sales and profitability.... in other words.... You found the crime, but attributed it to the wrong perp!! That's the tendency when trying to "get someone"... Looking at all facts through a filter of presumed guilt...

These were created under the assumption that Philidor business via VRX would materially expand in the coming months/years. Philidor would be the back-office processing unit while these new entities would presumably be the licensed distributors with the NPI codes, which obviously won't happen now. Yes, these entities were created to help recoup insurance payment. But so long as it was these entities dispensing the actual drugs, there's no illegality in using them to recoup payment!

There appear to be some instances where Philidor used other NPI codes to recoup payment while dispensing drugs via Philidor - which would be improper - but the vast majority of scripts were reimbursed via proper channels. John, you have a good sense of pointing out contradictions, but the statistical sampling is weak.

I think it is most likely that Valeant is trying to surprise the market and have an I told you so moment. You should keep in mind that one analyst at least suggested that they should not have been so ready to close Philidor. This is a way to come over top of everyone. I disagree with you that Ackman was probably unaware of this information. He was probably counting on it when he settled on his options strategy. He is still in the frame of mind of trying to outsmart the market in my view. He probably thought about the timing of the surprise of good earnings even after the philidor closing and designed his strategy based on that.

Two drugs sold by Valeant Pharmaceuticals International to treat cancer-related skin conditions increased in price by about 1,700 percent over the last six years, according to a newly published survey that found big increases in the cost of dermatology drugs across the board.

Over all, retail prices of 19 brand-name dermatology drugs from various manufacturers, for acne, infections and other conditions, increased in price an average of about 400 percent from 2009 to this year. Even some generic drugs almost quadrupled in price, according to the study, which was published Wednesday by the journal JAMA Dermatology.

“We’re not talking about new drugs,” said Dr. Steven P. Rosenberg, a dermatologist in West Palm Beach, Fla., who led the research. “We’re not talking about exotic drugs. We’re not talking about drugs that are listed as being in shortage.”

The price increases, he said, “have been off the charts. None of this makes any sense other than that they can get away with it.”

This is very interesting work product. Why is it that everytime either Bronte or others who have unearthed concrete data that undermines the Valeant bull case, Bloomberg's Stephanie Ruhle attacks the messenger rather than offering up an analysis of the data? Proof positive that Ruhle is an Ackmam puppet.

This is a very interesting find and good work. If all or many of these on the list are linked to Valeant (VRX) then that will raise more questions. However, with regard to the material relation to the percentage of revenue from specialty pharmacies, it is probably less that 3% (x-Philidor) as per slide 8 (http://s1.q4cdn.com/484041954/files/doc_presentations/2015/10-26-15-Investor-presentation-Final4.pdf). I wouldn't Short VRX today based on this list and specialty pharmacy revenue/earnings. But if this company can be this shady in this area then I wonder what skeletons they have still unexposed? Going to be interesting to follow this one.

First, Raffatt said the recent uptick in IMS scripts after Philidor was shut suggests there is no reliance on non-traditional distribution.

Second, the analyst said he went through and aggregated the registration dates of all pharmacies mentioned in today's blog post. Unlike what the blog said, all pharmacies listed in the post were registered prior to Aug 18th, he notes.

Third, unlike R&O, in thier initial search, they haven't found any pending litigation on any of these pharmacies.

Short sellers have been making false, unsubstantiated claims about Valeant for months in an attempt to drive down our stock price, and today’s allegations also contain significant inaccuracies. Valeant has already disclosed that 7.2% of our sales this year through the third quarter went through specialty pharmaceutical channels, and that has not changed. As we have said, in October we decided it was appropriate to sever our relationship with Philidor after allegations about their business practices came to light. The entities mentioned today appear to have been formed on or prior to 8/18/2015, based on public records. Furthermore, our board of directors has appointed an ad hoc committee to review allegations related to Valeant’s business relationship with Philidor and related matters.

What I find interesting in the response is Valeant claims "significant inaccuracies" and then fails to point out a single inaccuracy. The company's PR is being managed like a political campaign for a systemically dishonest politician.

I think John's point on Philidor 'efforts' after Valeant turned them off are related to the Gary Tanner hearing in Arizona. That happened in November.

The question is whether that was a Philidor thing or he was moonlighting or setting up an exit trade. The LLC he used for it was set up months earlier, and the application to the AZBOP was months before - still clearly in the "Valeant Hearts Philidor" phase.

However, if he was a Valeant employee working for Philidor, he could simply have said "we're not going ahead with this" and cancelled his appearance. If it is Gary Tanner working on for Philidor (i.e. he can't go back to Valeant), then this means Philidor is raging against the dying of the light.

Or it means that Gary Tanner is working on his exit trade.

But given that the Physician in Charge in front of the AZ Board of Pharmacy in that video was the PIC at Philidor RX Services' pharmacy in Arizona, that suggests this is Philidor starting something new, or Valeant starting something new with its vehicles.

John:1-Post 10/30 pharmacy registration data would be compelling . Name selection genre has likely morphed if there is any continuing activity .2-Do you have any thoughts as to whether Pershing's recently acquired call spreads are one leg of a tax strategy which enables Pershing to liquidate high basis shares on or after 12/24/15 ; with 95 & 100 call speads remaining ?3-Do you have any thoughts as to why Pershing re-entered the VRX market on 11/20 as opposed when VRX languished between 70 & 75 ?

Interesting if true (and there is no direct proven linkage to Valeant). However even if true this affects at most 2-3% of their total revenues. The author is hunting fleas with a microscope and ignoring the dog's bite. Typical short misinformation, albeit highly transparent and deceptive. VRX will be triple digits by year end because the business model remains intact.

@John Watson,Perhaps your inability to see the inaccuracies is due to the fact that you are hoping not to see any, hence you do not look. From my post just three above,"Evercore ISI analyst Umer Raffat addressed today's Bronte Capital blog post on Valeant Pharma (NYSE: VRX).

First, Raffatt said the recent uptick in IMS scripts after Philidor was shut suggests there is no reliance on non-traditional distribution.

Second, the analyst said he went through and aggregated the registration dates of all pharmacies mentioned in today's blog post. Unlike what the blog said, all pharmacies listed in the post were registered prior to Aug 18th, he notes.

Third, unlike R&O, in thier initial search, they haven't found any pending litigation on any of these pharmacies.

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